Laura Unger, Securities and Exchange Commission (SEC),
told the Senate Banking subcommittee on securities and
investment, that research by SEC economists shows that the
average bid/ask spread has narrowed with decimal trading on
the New York Stock Exchange and the Nasdaq Stock Market by
37% and 50% respectively.

She noted that the narrowing of spreads makes it likely
that investors, entering small orders that are executed at
or within the price quoted, have experienced reduced
trading costs.

Prior to the move to decimals earlier this year, which
now sees shares trading in smaller increments, spreads
typically varied between 12.5 cents and 50 cents,
translating into larger profit for brokers, who base their
cut on the size of the spread.

The saving of an estimated $3 million a day in
transaction costs was one of the major reasons behind the
SEC’s move to require all stocks traded on US bourses be
quoted in dollars and cents rather than in fractions by
April this year.

Stepping Ahead

Unger voiced concern over the alleged “stepping ahead’
of investors by market makers, noting that new smaller
increments make it easier and cheaper for these major
players to profit from trades by “stepping ahead’ of
investors with offers just slightly higher, when they have
a big institutional investor lined up to buy the stock.

Exchange regulations demand that a market maker who
wants to step ahead of a customer order pay a price that is
greater than the order by at least the minimum increment,
which was much higher before decimalization.

This practice can lead to higher transaction costs and
reduced transparency of prices in the market as other
traders try to hide their orders from market makers, which
could be detrimental to the small investor, Unger
noted.